Uncertain Path Ahead For U.S. Mortgage Giants

January 30, 2011

Scott Horsley

The Obama administration was supposed to offer a restructuring plan for mortgage giants Fannie Mae and Freddie Mac by Monday, but the plan has been delayed at least until mid-February as policymakers struggle to define what the future of mortgage financing should look like.

It probably won't look like Fannie and Freddie. Before their takeover, the two existed in a kind of grey area: independent, for-profit companies to finance home mortgages, but with an implicit guarantee that if they got into trouble, the government would bail them out. It was a recipe for trouble.

"You can be a private company and you might succeed and make a fortune or you might go broke and lose everything. That's fine," said Alex Pollock of the American Enterprise Institute. "Or you can be part of the government. But you can't be both at the same time."

The implicit government guarantee allowed Fannie and Freddie to funnel money from investors into the ballooning housing market. When the balloon popped in 2008, those investors were taken care of, but taxpayers were stuck with a big bill: more than $130 billion so far.

"Ordinary working stiffs are being taxed so that the bondholders can be paid off," Pollock said.

No Consensus On Future

While there's widespread agreement that Fannie and Freddie's model was broken, politicians disagree about how much that contributed to the overall financial crisis, and about what should come next.

"It's safe to say there's no clear consensus yet on how best to design a new system," Treasury Secretary Timothy Geithner said last summer. "But this administration will side with those who want fundamental change."

The shape of that change is still forming five months later. Conservatives like Pollock say the government should generally get out of the business of bankrolling mortgages and leave most of that market to the private sector. Not everyone agrees.

"Banks were the originators of these mortgages that went into Fannie and Freddie portfolios," said William Gross, co-founder of the big bond fund PIMCO. "To suggest they can do a better job than Fannie and Freddie is certainly the pot calling the kettle black here."

Gross said he'd be reluctant to invest in mortgages that didn't have government backing unless the homeowners made big down payments — as much as 30 percent — or paid a significantly higher interest rate. Others warn that without government support, the classic 30-year, fixed-rate mortgage would be out of reach for many families.

Government Role

"The home is still the place where families have been able to build up for retirement, for entrepreneurial activities, for kids' college," said Sarah Rosen Wartell, a housing official in the Clinton administration who is now with the Center for American Progress. "I'm not sure those opportunities would be there any more."

Wartell proposes an alternative financing scheme that relies heavily on private capital to bankroll mortgages, but also includes a government insurance fund to guarantee those investments. Unlike Fannie and Freddie, the government would charge investors a fee to pay for its insurance, which would only be available for bundles of high-quality mortgages, not the so-called "liar loans" that were all too common during the housing bubble.

"One lesson we've learned crystal clear is that we ought to only be supporting safe, secure, sustainable loans, that it's rational to assume buyers have the ability to repay," Wartell said.

The fight over Fannie and Freddie is part of a larger debate about the appropriate role for government in supporting the U.S. housing market. That market is still fragile and heavily dependent on the government-run giants for new home loans. So any transition is likely to take time.

PIMCO's Gross says whatever the long-term future of housing finance, the immediate future will be messy.

"It's definitely a food fight," Gross said. "And it will take time to resolve this and cans will be kicked for several months at least, or maybe several years." Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.